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The Effect of the March Health Legislation on Prescription Drug Prices

November 4, 2010

In a letter sent today to Congressman Paul Ryan, we described our analysis of the effects on prescription drug prices of certain provisions of the health legislation enacted in March.

That legislation requires manufacturers of brand-name drugs to provide new discounts and rebates for drugs purchased through Medicare and Medicaid, with the amount of those discounts and rebates based on the prices of the drugs. Manufacturers thus have an incentive to raise those prices to offset the costs of providing the new discounts and rebates, although other forces will limit their ability to do so.

For drugs covered by Medicare’s drug benefit, CBO estimated that those provisions of the legislation will raise the prices paid by pharmacies less any rebates paid to insurers by manufacturers by about 1 percent, on average. That increase in prices will make federal costs for Medicare’s drug benefit and the costs faced by some beneficiaries slightly higher than they would be in the absence of those provisions, while the new discounts will make the costs faced by other beneficiaries substantially lower.

For newly introduced drugs purchased through Medicaid, CBO estimated that those provisions will raise the prices paid by pharmacies by about 4 percent, on average. For currently available drugs purchased through Medicaid, which account for the bulk of projected Medicaid drug spending over the next decade, other provisions of law will constrain manufacturers’ ability to raise prices to offset the new rebates. The combined effect of the increase in prices and new rebates is that Medicaid will pay less for drugs, on average, than it would in the absence of those provisions.

The legislation contains several other provisions that will affect drug prices as well:

It establishes an abbreviated pathway for approving “follow-on” biological drugs, and the resulting increase in competition will yield substantially lower prices for certain drugs. However, the affected drugs represent a relatively small share of projected total drug spending over the next decade, so CBO estimated that the average effect on drug prices will be modest—a reduction of about 2 percent in 2019.

The legislation also imposes an annual fee on manufacturers and importers of brand-name drugs. CBO expects that the fee will probably increase the prices of drugs purchased through Medicare and the prices of newly introduced drugs purchased through Medicaid and other federal programs by about 1 percent. Those increases will be in addition to the ones described above that stem from the new requirements for discounts and rebates.

Furthermore, the legislation expands drug coverage under the Medicare benefit (by gradually filling in the coverage gap, or “doughnut hole”) and extends insurance coverage to people who would otherwise have been uninsured (more than 30 million non-elderly people by the second half of the decade, according to CBO’s estimates). Both of those expansions in coverage could affect drug prices—but CBO estimated the expansions’ overall effects on insurance premiums and federal spending and not their effects on drug prices in particular.

The various provisions of the legislation will exert competing pressures on drug prices paid by private purchasers. CBO estimated that the overall impact on those prices would be small, on average.

Given the intricacy of the mechanisms for setting drug prices and the numerous features of the health care legislation that affected those prices, CBO’s estimates of the effects of the legislation on drug prices were necessarily uncertain. The actual effects could be larger or smaller than CBO estimated.